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Stemming the Tide of Government Growth

The current debate on entitlement reform is just the latest chapter in the epic shift of responsibility from the individual to the collective that has taken place over the past 80 years. The first chapter was the advent of Social Security in 1935, followed by others, including disability insurance in 1956, Medicare and Medicaid in 1965, prescription drugs in 2003 and Obamacare in 2010. The shift of responsibility to the collective is global and particularly well established in Europe. Why does this happen, and what are the consequences?

The shifting of responsibility normally is caused by a shock or crisis, for example, a war, depression, natural disaster or terrorist attack. The government responds to the shock, and in doing so takes on responsibility and power it did not have prior to the shock. Government power may recede when the shock is over, but normally not to its pre-shock level. The process repeats with each subsequent shock, causing increased government control over time. This phenomenon was well documented by Robert Higgs in his 1987 book, Crisis and Leviathan.

The shifting of responsibility to the collective has at least four consequences. The first is that individuals become dependent on the government for the responsibility that has been shifted, and lose some freedom in the process. The government, now responsible, calls the shots. It tells you what you get, when, how much, whether it’s indexed to inflation, whether your spouse gets anything — the list is almost endless. These are choices you once made for yourself, but now you don’t.

Second, resources are also shifted because the government has to provide for its new responsibility. It gets its resources from taxing the very individuals whose responsibilities it took over. To the extent that the new taxes decrease the aftertax return on saving, investing or labor, there is less of it, which leads to slower economic growth.

“The current debate on entitlement reform is just the latest chapter in the epic shift of responsibility from the individual to the collective that has taken place over the past 80 years.”

The third consequence is that to the extent that the government allocates its newfound resources less efficiently than the private sector from which it took them — which is often the case — economic growth slows even more.

Finally, responsibility is rarely shifted back to the individual. This is because the collective is protective of its new power, and the individual does not have the clout to reverse it. It takes a groundswell of individuals to reverse the course, a difficult task at best.

In the case of Social Security, the shock was the Great Depression. Franklin D. Roosevelt responded to the crisis in his 1935 State of the Union address:

“Closely related to the broad problem of livelihood is that of security against the major hazards of life. I shall send to you in a few days definite recommendations [that] will cover the broad subjects of unemployment insurance and old-age insurance, of benefits for children, for mothers, for the handicapped, for maternity care, and for other aspects of dependency and illness where a beginning can now be made.”

Thus, the shifting of responsibility started. When the depression was over, Social Security didn’t end. In fact, it has expanded to the point where nearly all retirees are now dependent on the collective. The government writes the rules — mind-boggling in their complexity — thereby reducing individual choice. In order to finance the benefits, the same individuals who ultimately receive benefits are required to give up resources. Given that total resources must at least equal total benefits, there is no net gain, but a redistribution of wealth from one cohort to another.

As Social Security has confronted new shocks, such as unfavorable demographics, the government has responded by decreasing benefits and raising taxes, causing an inefficient system to be more so. Given that the system faces a present unfunded liability in the trillions of dollars, scheduled taxes and benefits will not be honored. Yet, totally consistent with the fourth consequence, the collective holds on, disallowing any competition that would shift responsibility back to the individual.

As we now confront the shock of virtually unaffordable entitlements, this history sheds light on what we’re likely in for. The collective will probably gain more power and further increase individual dependency while decreasing individual choice. Additional resources will shift to the government so that the fundamental structure of Social Security remains intact, a political imperative of the collective. Competition from the private sector will not be allowed. All of the above will lead to less economic growth.

Although rare, there are instances when responsibility has shifted back to the individual. Still, don’t look to a particular political party for the reversal, for each has a history of promoting and protecting the collective.